MiMedx Group Inc (MDXG) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the MiMedx Group Inc. Third Quarter Earnings Release Conference Call. My name is Erica and I will be your operator for today.

(Operator Instructions)

I would now like to turn the call over Thornton A. Kuntz, VP of Human Resources and Administration. Please proceed.

Thank you, Erica, and good morning, everyone. This presentation contains forward-looking statements within the meaning of the Section 27-A of the Securities Act of 1933 and Section 21-B of the Securities Exchange Act of 1934.

These statements are based on current belief and expectations of our management and are subject to risks and uncertainties. Actual results may differ materially from those set forth in, contemplated by or underlying the forward-looking statements based on factors (inaudible) this conference call and in our reports filed with the Securities and Exchange Commission, including our form 10-K for the year ended December 31, 2012, and our most recent 10-Q.

We do not undertake to update or revise any forward-looking statement except that is maybe required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under federal security laws.

With that, I will turn the call over to Pete Petit, our MiMedx Chairman and CEO.

Thank you, Thornton. Welcome and thank you for joining us for our third quarter of 2013 conference call. I have with me today, Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Senior Vice-President and Chief Financial Officer. There are other corporate officers present.

We had another very productive and very active quarter filled with a number of issues. We exceeded the upper end of our revenue forecast, which puts us eight consecutive quarters of beating or exceeding those revenue guidance goals and we produced increased EBITDA as a result.

One area that should be of interest is the fact that the Centers for Medicare and Medicaid Services or CMS announced in July of this year that they are proposing changes to the way skin substitutes are reimbursed. This is our EpiFix, our wound (inaudible) reimbursed.

And the 2014 hospital outpatient prospective payment system, which is called OPPS, proposed rule which covers hospital outpatient ambulatory surgical center reimbursement. CMS recommended bundling, or as they call it, "packaging" for products used in advanced wound care into one reimbursement code. CMS noted it was seeking to promote efficiency in the delivery of healthcare services and long-term cost containment. This basically means that one fee would include the fees associated with the doctor's activities as well as the cost of the grafts.

We're in agreement philosophically with CMS making this change in reimbursement. There has so much waste associated with skin substitutes used for advanced wound care and healing, that we think that CMS was compelled to recommend making these changes.

Our two major competitors, AlphaGRAFT, which is manufactured by Organogenesis, and DERMAGRAFT, which is manufactured by Scherer Pharmaceuticals, have major waste factors associated with the use of their grafts.

Each of these products are offered in only one size, 37.5 square centimeters for DERMAGRAFT and 44 square centimeters for AlphaGRAFT. There are numerous medical publications that highlight the fact that diabetic foot ulcers have a median size of approximately 1.3 square centimeters and venous leg ulcers have a median of 2.3 square centimeters.

With their grafts that are 15 to 20 times larger than most wounds, the remainder of the graft is discarded since this a single use product only. That is massive wastage that probably averages 80% of the graft is discarded.

We've analyzed a substantial amount of CMS data and we estimate that there is over $100 million of CMS reimbursed dollars per year product being discarded from these two products alone, plus there is waste in the Veterans Administration in Medicaid and in private health plans. Therefore reimbursement changes must occur. On the other hand, MiMedx has been extremely cost effective because our grafts come in size appropriate grafts. We have a number of grafts available and they range in size from 1.5 square centimeters and up.

There is very little waste associated with our grafts and this is one of the primary reasons they have been so widely and quickly accepted. On the "packaging" proposal physicians will be motivated to use the most cost-effective grafts so we believe the proposed change will enable us to increase our market share.

In addition our grafts are shown to be significantly more clinically effective than the AlphaGRAFT and the DERMAGRAFT products. Comparing the publications associated with the clinical results of those two products and our publications on EpiFix we're showing healing rates of 40% to 60% higher than those products.

Also we've been quite busy in Washington meetings with senators and congressmen and encourage them to support the CMS reimbursement change on skin substitutes. Of course Scherer and Organogenesis have been busy opposing the proposed change. We expect the decision from CMS on this matter by November 7.

Although there are many possible outcomes to this initiative we feel that two are the most likely. First, CMS could decide to postpone this initiative. But we sincerely believe that because of the massive wastage that has been occurring on certain of these tissue substitutes that they will eventually make these types of changes. If it is postponed reimbursement will continue as it has been. And we will expect to continue to gain market share because the cost effectiveness and clinical effectiveness our allografts.

The second possibility is that CMS decides to make the change to either single or multiple bundles effective January 1st. If this is the case, this will significantly disadvantage DERMAGRAFT and Organogenesis products due to the single large size.

Another topic of interest is our FDA meeting. I believe this meeting was enlightening to us as well as to the FDA staff. I believe the scientific information and clinical information that we provided was enlightening because some members of the clinical staff stated that was the case.

They stated they would take our new data into account and get back to us quickly with their comments.

What we'd like to make clear is the company has numerous ways to resolve any FDA issues of this nature. We have very experienced and competent consultants as well as staff experienced in this area which would allow us to make very quick decisions depending on the FDA's determination.

We think there are numerous precedents for our micronized products to remain on the market. There's certainly no safety issues associated with this product since we've shipped over 18,000 micronized units without any reported adverse reactions. We've shipped over 170,000 of our sheet [allografts] grafts with the same results.

We have one peer-reviewed publication on our randomized control trial for EpiFix micronized being used for (inaudible) fasciitis. Thus we have a number of alternatives which would allow us to continue in the market with this micronized product. Either way we hope to resolve this matter quickly.

I would like to mention one other successful project was completed in the third quarter. That was the distribution agreement that was signed with Medtronic. As you well know Medtronic is the largest medical -- excuse me -- Medtronic is the largest medical device manufacturer in the world. As such, they select their partners very carefully. We spent over a year working with Medtronic as they evaluated our allografts and our corporation. It's very exciting to have Medtronic show their strong interest in our allografts.

And as you might know, Medtronic commands almost 40% of the spine device market in the US. And allografts will eventually be utilized in some of those procedures. Also Medtronic offers us potential international distribution which is an area where we have very few initiatives. We're looking forward to a strong relationship with Medtronic for our product additions in these areas.

It's been an extremely busy period for our executives as we've dealt with numerous strategic matters. These involved improving our relationship with the Veterans Administration, with CMS and now with the Food and Drug Administration. Even with all those strategic activities, our management brought our quarter in ahead of expectations. Certainly, congratulations are in order for our staff and management.

I pass the meeting over to Bill Taylor now. Bill?

Thanks, Pete. From a sales and operational perspective, as Pete said, we'd consider this past quarter a very strong success. I would also like to thank and congratulate our entire organization for staying focused on our customers and the patience that they've served considering all of the distractions.

The Purion Process Tissue is a remarkable product that helps people every day and in many cases has changed lives. Even with the significant distractions related to the untimely letter, our organization was able to exceed the upper end of our guidance. With that in perspective, our Q3 revenue was just a few hundred thousand dollars less than our first nine months of last year so it's a very strong performance.

Mike Senken will discuss the revenue breakdown in more detail. But I want to highlight that a large percentage of our growth came in the commercial wound care side of the business as we expected. Our reimbursement team is growing. It has been very successful in obtaining more widespread coverage for our issue. We have a long way to go but are making progress every day.

Also you'll note that our gross margins this past quarter came up a bit. We had several factors combined for that improvement including some favorable mix. But we expect in the next few quarters it will likely be somewhere in between the second and third quarter actuals.

Regarding our building move, the facility improvements are concluded and our clean room validations are essentially complete. We will migrate our processing in stages over to the new building over time as we mentioned previously. As you can imagine recent issues have understandably taken a good deal of management attention and a move like this is a big endeavor. So we expect to finish this move over this coming quarter, this quarter.

On the publications front our success has continued with the acceptance of another two EpiFix publications. This time in JAPMA which is the Journal of American Podiatric Medical Association by Dr. Alap Shah. And another one in Wound Medicine.

The second is a long-term follow-up study from our first EpiFix RCT and crossover study with the principal investigator Dr. Charles Zelen. The bottom line is that 9 to 12 months after the treatment with EpiFix 94.4% of the wound remained fully healed. Basically one out of 18 had recurred or 5.6%.

This is significant because it had been published the typical rate at the year mark are upwards of 35% recurrence and about 60% recurrence after three years. A recurrence rate of less than 6% in less than 9 to 12 months is an excellent outcome. This paper was also the subject of a poster presented in SAWC, the symposium on advanced wound care and won best in show for its class.

Now turning over to our sales force, we continued to expand our sales force over this past quarter. And we increased from 56 executives at the end of Q2 up to 66. So from 56 to 66 at the end of the Q3. We still expect to have between 70 to 80 people total at the end of this year and are targeting territories and candidates in new areas.

We completed a mid-year sales meeting two weeks ago and I continue to be impressed with the strength and professionalism of our sales executives. Entering this last quarter we repositioned and promoted several of our sales management team members to achieve better communication and efficiencies within the sales team, one notable change is that while we still essentially two sales persons at the account executive level, one focusing on the Federal accounts and another on commercial wound care, we have combined the regional and national management teams.

This has already led to streamlined communication and more efficient call patterns for the sales executives. We made this change on October 1st. In this structure we have the flexibility now to allow a federal team account executive to call on a few commercial accounts if it makes sense in a given territory and vice-versa. So over time this could merge into simply one overall sales force. But as of today we still have two largely separate groups.

Now, Pete described our activities with respect to the proposed CMS changes and our efforts to support the initiative. I'd like to highlight a few things about the chronic wound market, its size and how our size-appropriate grafts help reduce waste that has been previously associated with this category.

First let me walk you through how our size-appropriate grafts are an advantage for us and how that relates to the proposed CMS bundling change or packaging change. Since 50% of diabetic foot ulcers or DFUs are 1.35 centimeters or less as it was reported in the median in a recent publication, our small disk which is around $300 can be used with minimal if any waste.

This is compared to the competitors who are up around $1600 or $1700 and waste the majority of their products for those 1.35 square centimeter or smaller wounds. The current proposed one-tier bundling approach would pay around $874 per procedure including the skin substitute. Clearly this puts EpiFix in a favorable position for the 50% or smaller DFUs especially when you take into consideration the healing rates.

Also note that after analyzing the 2011 data, the Mimedx has proposed for CMS to use instead of one-bundling rate, four bundled payments based on wound size so that the small percentage of very large wounds would be reimbursed at a higher bundled rate.

Now I'm sure many of you are wondering how this relates to our chronic wound market opportunity. First I want to highlight how a very large amount of these wounds are treated with conventional therapy such as wound dressings that do not utilize advanced therapies. But they would if a lower priced shelf stable product would be available like EpiFix. First of all, the chronic wound market in the US is very large.

It has been reported that there are approximately one million patients suffering from DFUs, diabetic foot ulcers in United States annually, and just shy of 900,000 VLUs or Venous Leg Ulcers annually. And according also to a recent publication a median wound size for DFUs as I've mentioned is 1.35 square centimeters and for VLUs is around 2.3 square centimeters. Now, according to the same publication, 77% of all DFUs and 66% of all VLUs are less than five square centimeters.

Now, this means that when the two large skin substitute products, AlphaGRAFT or DERMAGRAFT are used, most of their product is thrown away, in excess of 80% of it for those majority of wounds that are five square centimeters or less. That's a major advantage for us. Now, there are several ways to model the EpiFix chronic wound market opportunity. I think the very basic approach for DFUs first, if you look at the one million DFUs in the US annually and then use the breakdown from the recent publication in the Journal of Wounds that came out in July.

According to that population, 50% of these are 1.35 square centimeters or less, so they can be treated with our $300 disk. Assuming it takes two and a half applications on average to close a wound, that would 500,000 wounds times $300 per disk times two and a half applications, which ends up being a $375 million addressable market.

Then, you take the next 27% of the wounds that are between 1.35 centimeters squared and five centimeters squared and then you use our two by three graft or six square centimeter graft, assuming it needs three applications to close that wound using on average two of the two by threes and one disc. You'll use the one disc on the third application because the wound gets smaller.

That's two EpiFix at $1,200 each and one at $300 times 270,000 wounds which equates to about $730 million in market opportunity. Then, next you take the 16% of the wounds that are between five and twenty square centimeters. Conservatively, assume that also only takes three applications to close a wound and it uses a combination of our four by fours or sixteen square centimeter grafts and our two by threes over those three treatments.

Those wounds would then drive about another $1 billion in market opportunities, a little bit above that, so that even without taking into consideration the wounds above twenty square centimeters. So the EpiFix specific opportunity in the DFU market alone is in excess of $2 billion. And knowing that the VLU prevalence rate is nearly as big as the DFU problems rate only with a slightly larger wounds, then the combined total of the DFU and VLU market as expressed in terms of EpiFix is in excess of $4 billion market opportunity.

So, we only need to reach 2 1/2% of that in total possible market of people with VLUs and DFUs and we'll hit our $100 million in revenue in EpiFix alone next year just by hitting that 2.5% of that addressable market. And I want to remind that this does not even include other chronic wounds or any acute wounds, so this is a very, very large market. Changing gears now, Pete already described our meeting with the FDA on Monday and I wanted to add one little bit of color on my own.

I would characterize the meeting as going essentially as expected, possibly a little better considering that they seemed open and receptive to the new information that we presented to them and indicated they would review it and determine if it affects their previous decision.

So, either it does or it does not. If not, then we expect to proceed much like others have, like Osiris and Axogen, among others.

Last, as Pete indicated we're very happy to announce our new distribution agreement with Medtronic during the quarter. This agreement came after over a year's worth of discussions, audits and negotiations and was signed after the (inaudible) letter was public. So, to have the largest medical device company in the world be interested in partnering with MiMedx is a true honor. And the agreement is non-exclusive and focused on spinal applications. It will be a private label version of our AmnioFix membrane.

At this point, we expect to start shipments late this quarter or early next quarter and we don't expect any impact on the rest of our distribution because this industry is very relationship focused. And generally speaking our current distributors do not sell into physician relationships where Medtronic is strong.

Also, we expect Medtronic will conduct additional clinical and scientific studies which will further describe the clinical and scientific benefits of our Purion Process [dehac] or dehydrated amnion chorion membrane tissue.

With that, I'll turn it back over to Pete.

Bill, thank you. Next, Mike Senken, our CFO. Mike?

Thanks, Pete. The company reported revenues for the third quarter of approximately $16.1 million, an increase of 103% or $8.1 million over the prior year third quarter revenue of $8 million.

Wound care revenue represented 57%, surgical and sports medicine 38% and other 5% of quarterly revenues. Sequential growth was driven primarily by wound care sales which are up 25% while surgical and support medicine revenue was up 10%.

Commercial revenue grew to 42% of total revenue from 39% in the prior quarter due to the increasing number of direct sales resources targeting commercial accounts in territories where we have mass coverage.

The revenue for the nine months ended September 30th, 2013 increased 149% to approximately $41.2 million as compared to $16.5 million for the same period in 2012. Wound care revenue increased 258% while surgical and sports medicine revenue was increased 95% when compared to prior year.

Sales to government accounts have increased almost 400% on a year-to-date basis recognizing that we only began selling direct into government accounts in the third quarter of 2012. Sales to non-government accounts have increased over 40% on a year-to-date basis as well.

Gross margins for the quarter were 87% as compared to 82% in the third quarter of 2012. For the nine months ended September 30th, 2013 gross margins were 85% compared to 79% for the nine months ended September 30th, 2012. The improvement was driven by favorable product and customer mix.

R&D expenses to the quarter were approximately $1.3 million or 8% of quarterly revenue which represents an increase of 53% as compared to prior year. On a year-to-date basis R&D spending was approximately $3.5 million as compared to $1.8 million in 2012.

The increase in R&D spending is driven primarily by increased investments in clinical trials. Selling, general and administrative expense was approximately $12.7 million for the quarter and $31.9 million year-to-date. The increase in spending as compared to prior year is primarily due to the move to a direct sales force for the wound care market. As Bill mentioned earlier the company gained 10 new direct sales resources during the quarter.

The company reported positive adjusted EBITDA for the seventh consecutive quarter. Included in today's press release is a supplemental disclosure that reconciles our reported net income to adjusted EBITDA. The company reported positive adjusted EBITDA of approximately $1.9 million for the quarter ended September 30th, 2013, which is a $1.1 million improvement as compared to an adjusted EBITDA of $726,000 in the third quarter of 2012.

Year-to-date adjusted EBITDA more than doubled to approximately $4.1 million as compared to $2 million in 2012. Year-over-year improvement in adjusted EBITDA is the result of higher sales volume and improved gross margins.

The net loss for the quarter was approximately $307,000 as compared to the reported net loss of $4.2 million for the quarter ended September 30th, 2012. It should be noted that the 2012 quarterly net loss included $1.3 million in expense for related to the Cervical Biologics acquisition earnout provision and also includes $1.8 million charge for the impairment of intangible assets.

The net loss of the nine months ended September 30th, 2013 was approximately $2.7 million or a loss of $0.03 per diluted common share as compared to a net loss of $6.1 million or $0.07 per diluted common share in 2012.

Turning now to the balance sheet, the company reported approximately $25.9 million total current assets, an increase of approximately $7.8 million as compared to the $18.1 million as of December 31, 2012.

The total asset amount includes approximately $6.1 million in cash which is an increase of approximately $1.9 million as compared to the June 30th, 2013 balance of $4.2 million.

The company reported $9.8 million in total liabilities, a decrease of $5.4 million as compared to the balance of the December 31st, 2012 of $15.2 million. The reduction was primarily due to the payment of the earnout and the conversion of the senior secured promissory notes earlier in the year offset by increases in normal operating liabilities.

Capital expenditures for the quarter were approximately $955,000 primarily related to the expansion of our production capacity, improvement to our IT infrastructure and additional facility related costs.

Turning now to the statement of cash flow, for the first time in our history, the company reported positive cash flow from operating activities of approximately $1.7 million for the quarter.

On a year-to-date basis net cash used in the operating activity was approximately $1.1 million, an improvement of $1.3 million as compared to the same period of last year. Cash used in investing activities for the quarter including capital expenditures and patent application costs of approximately $1.1 million and on a year-to-date basis were $2.5 million.

Cash flow from financing activities for the quarter were approximately $1.3 million including almost $1 million from the exercise of stock options and 300,000 from the exercise of warrants. On a year-to-date basis hosting from the exercise of stock options and the exercise of warrants were approximately $855,000 and $5.9 million respectively.

The company did not draw down on the working capital line of credit during the quarter. Turning now to our cap table, there are possibly 97 million share outstanding, 1.9 million warrants and 15.1 million stock options outstanding as of September 30th of 2013.

And one final note, the company will be presenting at the Canaccord Genuity Medical Technology and Diagnostics Forum/Conference in New York City on Wednesday, November the 13th. Please refer to the investor's section of our website to access the webcast of the conference. With that I will turn the call back over to Pete.

Thank you, Mike. Well, as you can tell it's been a very busy and productive quarter in spite of some distractions. In spite of our rapid growth, our management team is very effectively managing all of our new initiatives and process improvements. I'm very proud of this team and their results. They are quality professionals. With that I'll turn the call over to questions and answers.

(Operator Instructions). And your first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Please proceed.

Congratulations, gentlemen, on a great quarter.

Thanks, Matt.

Thanks, Matt.

A couple of questions, first on the gross margin, 87% is remarkable, I'm curious how we should be thinking about in Q4 and more specifically next year as you may see changes in the mix and as Medtronic comes on. I mean, do you think that falls back closer to 80% or how should that shake out?

Matt, this is Pete. I'm going to let Mike address that, but just let me remind you, about a year ago this quarter we cautioned everybody about a rapid, rapid revenue growth and said that we're excited about what just happened but it won't continue to happen that way. Mike is probably going to give you some of the same color on margins.

Matt, I think on previous calls we said, you know, we're still setting our plans together for next year, but an assumption between 80% and 85% is a good assumption for 2014.

And that's really driven by, you know, product and customer mix keeping in mind that, you know, we haven't started shipping on the Medtronic agreement, that is an OEM agreement and obviously in an OEM agreement the margins are slightly less than direct sales. So, I think, you know, 80% to 85% is a safe number.

OK, all right, thank you. Secondly, maybe an update on the reimbursement front, you're still at six out of the nine MACs, I'm curious about the dialog that's been going with the remaining three and then more importantly at least over the longer term. What are you hearing and how are you gaining reimbursement from the commercial providers, any update there would be helpful.

OK. This is Pete. I've spent a good, good amount of my time focused in this reimbursement are mainly because I've lived with it for decades. We're still having conversations with the three remaining MACs. Some days I think we make progress, other days I think we don't.

We still have hopes of bringing some closure to some of those by the end of the year. However, keep in mind that right now we have 80% coverage across the country so the three remaining MACs are not a major deterrent to our -- beginning next year in a very positive way.

Each of them is different. Each of them has their own little issues that they want to discuss or hold out. There's a reason they have given this coverage. There are some disruptions in terms of the MACs. There have been some consolidations. There's lot of confusion out there.

So it's not the focus on it we'd like to see, but we're still working on it every day. Generally, speaking on the health plans, I'll say this, having been around as long as I have this -- today's environment reminds me a little bit of when managed care first started blossoming in the early '90s.

There was a lot of confusion in the market and health plans always take that opportunity not to throw switches or not to turn coverage on when they should, so we're very busy, very focused with a number people in this organization on being certain that we get our switches thrown in the health plans and our coverage is initiated in a -- in a reasonably good timeframe.

We certainly have we think all clinical papers published that we should ordinarily need and it's just the case of working each health plan one by one, each medical director, and that's all.

As you know like, Don Fetterolf, our chief medical officer, has a lot of experience in this area, I do and a lot of our staff here that came from our former company does. And we're very busy everyday working with the -- what I call the reimbursement wars. It is a war. It's skirmish here. It's a battle there. But it's a war that gets fought tenaciously day by day and pretty soon those things are behind you.

Thank you. I'd add in here too, Pete mentioned there's a lot of changing with the different MACs. One case in point is I think four or five days ago, one significant change happened where NHIC, which was kind of up in the Northeast, got turned over and is part of one of the other ones now. I'm just trying to remember which one it's part of.

It's WPS, I think. That's right. But they consolidate -- so basically now there are eight MACs instead of nine now because of that consolidation. Excuse me, that moved to NGS, is where we're going to.

So we still have -- they'll be 80% covered lives even though now it's five out of eight instead of six out of nine. And so, there's really no change there. And expect that there's going to be more and more changes as these systems continue to trade programs over time. In terms of the ones that we don't have yet, we are making some progress with, I think, two out of the three. But this is really hard to project when we'll be able to clear those as of now.

Okay. Maybe one more for me and then I'll jump back in the queue. As you look at your current or look at the third quarter, what -- I don't know if there's a way for you to break out what percentage of those sales were coming from the DFU, VLU markets versus maybe some of the newer markets, whether it be the radical prostatectomies or the [mole] surgery -- is there a way to break out where you're seeing a bulk of your business?

Well, I can tell you it's a, you know, a lot of cases, we'll have to rely on our tissue utilization records, which are the records that are submitted after implant to see what kind of procedures that are used.

Other than that, it's tough, for instance, when EpiFix is out there and it's used either on a DFU or VLU or a [mole] surgery or a decubitus ulcer. There really is no way for us to know unless they report back on our [TUR] card. But we are trending that and hope to kind of factor that into some of our numbers going into next year. And maybe Mike can have another color on it too.

Yes. Obviously, Matt, that was -- those are the procedures that would be included in our surgical and sports medicine revenue that we gave some detail on here. But as Bill mentioned, we are finding and looking at the TUR cards.

There's actually a percentage of that surgical and sports medicine, which actually is accounted or should be accounted for in wound care. And we're trying to figure out how to -- how to report on that on an ongoing basis because we're dealing with data that is after the fact and we're trying to relate it back, so we're still working on that.

All right. Thank you. I'll jump back in the queue.

Thank you, Matt.

Your next question comes from the line of Bruce Jackson with Lake Street Capital. Please proceed.

Hi. Congratulations on the positive cash flow.

We agree.

Thanks, Bruce.

First on the -- to follow-up on the sales force expansion the [-- are the 10 hires in the] wound care commercial operations group?

Most of them were in that group. I think we had one or two that were in the -- in the federal side, but the majority of them, certainly were on the commercial side.

And then going forward, will the next hires be distributed between the different groups or, again, focused primarily on the wound care side of it?

Certainly the majority will -- we expect to be in the commercial wound care side, although there are a few pockets on the federal side that we still don't have the coverage we'd like, so it will be a mix, but it will be heavily-weighted on the commercial wound care side.

Okay, great. And then with the Medtronic agreement, sometimes these OEM agreements can be somewhat lumpy in their -- the ordering patterns. Are there any, like minimum sale agreements or anything in there? Or would the, you know, should we fasten our seatbelts for a little bit of volatility on that particular revenue line item?

But we -- we were fortunate in that we're able to kind of structure that in much the same way as our other distribution agreements, so you can imagine, anytime you have a start-up there is generally going to be a -- kind of a bolus order upfront and then trail off and then start going up in a more linear fashion.

So I -- you know, I would expect for a situation like this for it to be lumpy for a little while, but relative to any minimums or anything like that, I can't really comment on those kind of, you know, details of the contract.

Okay. Last question, with the inventory I notice it kind of ticked up a little bit is that related to the move of the manufacturing facility? Did you just build up some safety stock? Or is it just in anticipation of greater sales?

Really, a mix of a couple of things that we do expect that that's going to be kind of the peak for the year and based on planning now, coming out of fourth quarter, we should have a nice trending down in terms of that.

But we did have a fairly good buildup in preparation for the move just to make sure there are no issues. Also, as you recall just going into the year, we were -- I knew we were going to be growing wound care fast but not in -- we didn't exactly know how fast, so we wanted to make sure that we had sufficient inventory to cover that, so I think going forward, you'll see that number start to come down a little bit and be a little bit better in terms of our turns.

All right. Thank you very much.

Thanks, Bruce.

Thanks, Bruce.

Your next question comes from the line of Bill Plovanic with Canaccord. Please proceed.

Great. Thank you. Good morning and congratulations on a good quarter.

Thanks, Bill.

Just a couple of questions. First, on -- as we look at guidance, you know, I look at the range you're providing for Q4, and I'm just trying to understanding what would drive Q4 down sequentially from Q3?

You stopped us.

Well, I guess, if you're saying, if the lower end of our range is -- if we hit the lower end of our range, which is 57.9 milliion, if I remember the numbers correctly, we come in at 15.8 as opposed to 16.1 and that's -- and that's what you're concerned about?

That's why I'm asking the question, what would drive towards the lower end rather the higher end?

We just thought 57 million was a round number. We can -- we can round it up by 300,000 if you like, Bill.

Okay. Well, I'm just asking. And then there was no comment regarding the 2014 guidance or goals that have been out there earlier of 90 million to 110 million, I just wanted to see if there are any -- anything you'd like to provide there.

Well, we still feel those are the numbers that we'll (inaudible) provide details on in December after we have our December board meeting when we always provide guidance for the next year, but the management is still very confident with those -- that range and we haven't changed it.

Okay. And then, you know, you've had the meeting with the FDA, I think one of the comments was that -- and not to put words in your mouth, but I think as both of you came away enlightened, and I guess, my question for you is what -- what was enlightening to you in that discussion?

Well, first of all, I realized that it's the first real communications we've had with FDA staff other than one phone call in effect and a couple of short phone calls. In the meantime, over the last 60 days, as we asked for additional information, which they decided they didn't want to provide - or didn't need to provide. So the meeting itself was enlightening.

We met some of the staff on the clinical side, and some of the staff on the enforcement side. And we had, I think, shared a lot of information both ways and particularly the clinicians seemed to be -- because they told us that the information that we've provided was quite enlightening and they would take that into account as they made deliberations as we asked them to do, to reconsider their letter.

So I think from our standpoint, that was quite enlightening. I think we understand -- I think the clinicians' - excuse me, the agencies' issues even if they haven't really told us exactly what the specifics are. We have some of the same concerns they do in terms of the 361 can be loosely applied because it's up the corporation to make the termination.

And they have concerns about that as we do. We've seen some things happen with some of our competitors that were to us very blatant violations of 361. And we don't want to see that happen because we want to see -- as stewards of this technology, we want to see it enter the market in an orderly way, so there are no questions about the regulatory pathway and there are no questions about the way it's being used and the claims being made about it.

So I think we're very much aligned with the agency on matters of that nature. And we clearly conveyed that to them. We want to see this product, this whole area of amniotic tissue get in the marketplace and become a standard of care.

And I think we're well on our way and we don't want to see someone else cause issues that cause more regulatory issues or cause concern on anybody's part, whether it be physicians, patients or regulatory agencies.

Okay. And then is there a specific time rate, frame that FDA will get back to you post this meeting? Or will this be an ongoing, you know, discussion between FDA?

Well, they -- their commitment was to, the word was quickly. And I can't define that. I think it's in their interest that, to get this moved along and as it is in our interest. And if we have to work through some details we'll do that on our part very quickly.

So we think we're involved in this everyday at this stage and I think some of their staff is now, so we had the meeting we needed to have and we exchanged information. And I think both staffs are busy working on it.

And the last question -- I'm sorry?

I was going to say, the only other thing I could add is I think, you know, Osiris, one of our competitors, a week or so ago ahead in press releases discussing this situation where they had -- had some issues that brought their attention that, where they were in violation of 361 and they apparently quickly resolved that, you know, it's our intention to do the same, so we've got different issues here, of course, but we quickly want to get this resolved, of course.

And then if I may -- just any color you can provide with attraction that you're gaining at the MACs, so, you know, 2013, you got your code in place. You started getting on policy at some of these MACs.

And now, you know, you populated the rep into there. And I'm just, you know, any thoughts on, kind of, the contribution or the time to contribution or any changes or thoughts you may have would be helpful. That's all I have. Thank you.

Okay. Well, first of all, remember what Bill said. We have 80% of the country covered, so these last three is, actually would be the last 20%. We want that done just because we clear it off of our to-do list and we move on.

There's issues -- different issues with all three of them and some of them are beyond our control in terms of some of the internal issues going on within the MACs and the consolidations and things of that nature, new personnel coming in and those kind of things.

But it's something that I am personally involved in all of our reimbursement activities in this company. And I deal with matters on a day-to-day basis. So for what that's worth, we're very focused on it. And we'll work it on a -- on a daily basis.

So we'll bring it to conclusions. And the only reminder that I can give you is there was I think four or five other companies have got Q codes the same time we did and nobody has MAC approval number one, as far as we know. So we've done an excellent job of getting where we are and these last three we'll work through.

Also -- I'd like to point out too, just as a frame of reference when [ABH Shire] was up to $200 million a year in revenue, in diabetic foot ulcers alone, they had roughly 200 sales people, so with us being at 66 now in surgical sports medicine group, federal team and our commercial wound care team we've got a long way to go even in just the states where we have coverage, that 80% before we get full penetration in those states.

So we can continue to grow and drive our revenue and add sales people into that 80% even before, well before we even get coverage into those other three areas. So we've got a lot of room to grow before we have that coverage. So obviously we'd like to get that coverage as soon as possible but it's not slowing us down in the near term.

My question actually I was looking for a little more granularity on the actual contribution from the [MACs] in the quarter, right, because last year you didn't have anything from them you just got on board with the Q codes, you were just populating them with reps and getting them policy.

So to me as I look at the story for the company for the next 12 to 24 months the big piece of the revenue driver is revenues from the MAC. So what I am trying to kind of pull out of here really is if I look at this number. If your wound care number was call it 9.2 million roughly is two million of that coming out of the MACs versus nothing a year ago? Is a million, 3 million, how much of this growth is being driven by the MACs? That was the crux of my question.

All right, Bill, it's Mike. We did the breakdown of revenue between our government and commercial. And the way that breaks out on a quarter over quarter basis the commercial revenue grew 29%. That suffice it to say that all of that is driven by penetration into the direct sales and the MACs.

Well, not only the MACs but the direct sales.

The direct sales.

Yes. So we will have to come back with you on a little bit more defined number on that, Bill.

Well, I think the majority of that is from the MAC related revenue. I think that's safe to say.

And if I had to estimate, I'd estimate about three quarters of it but we need to go back and take a look at the numbers.

Okay, great. Thank you.

Your next question comes from the line of [John Monaco] with -- he is a private investor. Please proceed.

Congratulations from me also on a good quarter actually, good [full stint] of the corporation. I was just curious about this. Can you comment on the impact of any of the apparent legal actions that we see being discussed either by other or SEC regarding MiMedx or yourself for that matter?

Well our general counsel is in the room with me. And I will make, in spite of her trying to give me, her hand is moving from left to right but anyway let me give just a little color here.

Having run publicly traded companies for 30 plus some odd years, over the decades, it helped and/or (inaudible) -- we had two of these situations develop. The firms that deal in this kind of activity are very much opportunistic. Any time somebody has an issue that they'll shoot first and ask questions later.

Today the legal system has improved the way that they go about this and made it tougher on [them] to actually have good proof of what case they're bringing. There is nothing in here. I will simply say that and will move on. These cases will, generally speaking, go to a point where a federal judge will look at it and make a decision and in our two previous cases they were settled or thrown out.

So we don't have an issue here. It will work its way through. It will add some legal expenses, a bit of legal expenses to it over the next couple of quarters and that's it. It's taken very little management time. We are using the same law firm that we used here in Atlanta that helped us with the other two cases decades ago and it will -- this will quickly pass.

Yes, it's outstanding. Thank you very much for that input. That's all I had.

Your next question comes from the line of Matt Hewitt with Craig Hallum Capital Group. Please proceed.

Hi. Thanks for taking the follow-up. Just one for me. You know you talked at length and we appreciate the color on the bundled reimbursement. And I am curious, how do you envision and I know it's tough to say because it's your peers. But you've got these two competitors that are selling at an average price of well above even the bundled price. How do you think they respond if CMS goes ahead with those new [hops] rates?

Well, I think, number one, the only place their graphs are going to be used is going to be on very large wounds.

And one of those, the DERMOGRAFT product is used on diabetic with ulcers which is generally than the venous leg ulcers. So it's not going to be a good day for them. And that's why they are busy in Washington trying to convince senators and congressmen to campaign with them with CMS to not do this on the grounds that generally speaking, it is going to thwart medical innovation, cost jobs et cetera, et cetera, et cetera.

So I think they are on the wrong side of this argument. This is going on much too long and I've never seen it in my business career that this is -- as compelling as this case is. So I think it's just a matter of time.

Now remember too this is used for hospital outpatients and ambulatory service centers. So physician's office remains unchanged, physician's office will still be reimbursed at ASP plus 6%.

So they will have an opportunity to play there but obviously they are going to have to have, in the case of DERMOGRAFT, they are going to have to have a cryonic freezer there to store it which not all the physician offices do. And they could still technically play in DRG cases for the very large wounds. But again, they are not a high percentage of the frequency of wounds.

But I can tell you the whole industry is now focused on this, CMS has brought it to light and the lives being shined on it. And everybody realizes that, yes, this has gone on for a long time and we had to look the other way because there weren't alternatives. There are alternatives now, good alternatives and it's Mimedx.

And refresh my memory but if they do decide that they want to stay in this market because they went through a [PMA] process, they would likely need to amend those applications which would take time, correct?

That's correct.

Okay, great. Thank you.

Thanks, Matt.

Your next question comes from the line of Jon Block with Stifel. Please proceed.

Yes, great. Thanks, great, thanks. And good morning.

Actually I had a couple of questions. One was just answered in terms of how your competitors would respond if the reimbursement landscape changes. But I'll move to the second one.

It's just in terms of the reimbursement war that you referenced earlier, I mean, you also talked about a couple more papers ever recently published. What else do you think you need, is it just time or are the remaining MACs coming back to you and saying we want a couple more studies, we want a couple more economic studies, and if that is the case is there anything in the pipeline from a publication standpoint that you see coming through that may help you to, I guess, [with now] the remaining two MACs. Thanks, guys.

Good question, and the answers are yes, we have continuous clinical studies underway, some of which will deal with cost effectiveness, some of which will deal with the additional clinical effectiveness.

But frankly what we have today is more of the sufficient -- generally speaking, if someone is still pushing back there's other issues there in terms of personalities or I am here and saying that I am the new sheriff in town and I am changing everything, and some of those kinds of things go on.

And you just have to persevere and keep poking through it but time will take care of all of this and I can't tell you how focused we are and how we will persevere. I mean, that's just the way you have to do it. There is no simple solution other than it's just perseverance every day and making inquiries, getting other people to make inquiries, even when necessary going to congressmen or senators. So we will use all those tools, we've used them before successfully and we are just clicking them off day by day.

Okay. And maybe I will still try to go back and ask my first question a different way on the OPPS landscape. I mean, you mentioned you are out there trying to eliminate waste and lobbying on one side, your competitors because you are a little bit pigeon-holed, are on the other side of the argument. There is also the chance that this thing get tabled, sort of kick the can down the road.

Do you want to sort of say how you think this may play out or ascribe certain percentages to it? Do you think there is a very good chance we get a decision one way or the other this November, or do you think there is a decent chance that they are going to sort of move to the side and say you know what, we will table this and we will circle back in a later date. Thanks, guys.

Okay. Here is what we would say, I think. Number one, CMS has been very, very distracted in sales with some of the issues associated with the change in the healthcare process.

Unfortunately Ms. [Tavener] has been involved with that and her staff have now taken a vacation, so to speak, been furloughed. They came out with a press release saying they would normally have gotten done, made this decision by November 1st, they are going to make it by November 27th. So it looks like they are still working on the matters, and so, we will see what comes out of it.

Other than that to me it's a coin toss. There's lot of reasons to kick the can down the road. A hundred plus million dollars a year is a lot of money and as I've said to some senators and congressmen in Atlanta that's a lot of money. In Washington it's not necessarily lot of money.

So it may be a kick down the road, the can may get kicked down the road or they may take action, or they may take partial action. We don't know. And we just continue to do the things we think are right and we are on the right side of this argument regardless that CMS has the skin substitute wound and (inaudible) care side of this industry, is now very focused on it and understands it's an issue and you can't waste this kind of material without affecting the way people think about things. Everyone is thinking about it.

Great. Thanks for your time, guys.

(Operator Instructions). Your next question comes from the line of Troy Welker with IPT. Please proceed.

I don't have a question; I just want to say great job on everything you did. I couldn't be happier with what you have done.

I guess there is one small question. When you talk about them having going to go back for [BLA], your competitors, under the CMS issue, could they do something like what's put out in a press release from Osiris the other day that they are going to sell and why they work through a [BLA].

In the event that they have to resize their graphs [lengthily], would it take them very long and all to be able to resize their graphs, their dermographs from Shire and the other company to be able to compete with this, that this does affect? Or are they going to be frozen out for at least a year as they try to get their production facilities up and going forward.

Okay, let's just straighten the record out here. Osiris has petitioned out for graph like ours. They are totally different than the apograph and dermograph products. If apograph and dermograph wanted to serve the wound care market, and vaginal care market where the wounds are small, that they have to have smaller graphs in order to do that, they have got to take a rather lengthy process back through a supplemental PMA.

Frankly if I have been involved that way to make those kinds of decisions ago that you can't continue to do what they were doing and not provide smaller graphs. But they didn't make those decisions to where they are today and they've got to make decisions if this CMS reimbursement change takes place, as to how quickly and as fast as they can bring smaller graphs to market but it's probably going to take a year plus to do that.

Organogenesis has a different set of issues. They are like us. They can generally make changes very easily in terms of size of their graphs.

Thank you very much and thank you so much for all the work that you are doing. I know you had a great quarter and you work hard. Thank you so much.

Thank you.

We have no further questions at this time. I will now turn the call over to Pete Petit for any closing remarks.

Okay. I may add one thing here in closing that our general counsel suggested that I make the thought to comment. And we think that the claims that has been made by the strike firms are subject to dismissal. And we intend to move for dismissal at the appropriate time in front of the federal judge.

That takes care of our comment. I appreciate your interest in being on the call and if we didn't get your questions answered please feel free to pick up the phone and call us and we will answer at that time. Thanks so much.

Thank you for your participation in today's conference. This concludes the presentation and we will now disconnect and have a great day.